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Insurance

Medical credit cards come with a catch

AnishaSekar

What’s the catch of medical credit cards?

If you're considering Lasik, cosmetic surgery or other procedures not typically covered by insurance, you've probably heard of medical credit cards. These lines of credit offer 0% interest for six, 12 or even 24 months and allow you to pay for these elective procedures over time.

Sounds like a great deal — but there's always a catch.

How a medical credit card works

Since medical credit cards are predominantly used for elective procedures and veterinary care, you have time to arrange your payment beforehand. Before the procedure, you agree with the doctor, vet or hospital to pay with a medical credit card. This sets the terms of the plan, such as how long you have to repay the debt and how much you'll pay each month. If you stick with the payment plan, you typically don't have to pay interest.

But the value of medical credit cards disappears when you veer off the straight and narrow.

If you miss a payment or fail to pay off your debt in time, you're usually hit with a high interest rate — currently 26.99% for a CareCredit card. Unlike a credit card, you don't just owe interest on the unpaid balance. Missing a payment triggers retroactive interest on the entire amount that you borrowed. This can only compound the financial difficulties that led you to miss a payment in the first place.

What’s the danger?

Because the interest rate is so high, and is applied to your debts retroactively, medical credit cards are a dubious prospect. A statement by the New York attorney general's office alleged that one in four people who took out no-interest-if-paid-in-full cards ended up paying the 27% interest rate — meaning that 25% of users were unable to repay their bills in time.

In fact, under the terms of a recent settlement with the state of New York, card provider CareCredit will have to issue nearly $2 million in refunds to consumers. The state accused CareCredit of having deceptive terms and pushing the cards on unwary patients.

There are times when a medical credit card is a good idea, but such times are few and far between. If you can pay off your debt in 18 months or fewer, you are better off paying for the procedure on a low interest credit card. These cards offer 0% interest for up to a year and a half, and offer two advantages over medical credit cards: The ongoing interest rate is lower, and you won't be hit with retroactive finance charges if you fail to pay off your bill in the promotional period.

If you need the extra six months to pay off your bill and are absolutely positive that you won't miss your payments, you can consider a medical credit card. But if you need a full 24 months to pay off the cost of the procedure, chances are you're vulnerable to changes in income or short on cash. Those two factors increase the risk that you won't be able to pay off on time. Unless you're confident in your income stream and diligent about budgeting, a medical credit card is a risky proposition.

How else can you finance a procedure?

As mentioned before, low-interest credit cards are one way to pay for medical expenses not covered by insurance. There are other options available as well:

You might be able to withdraw money from your IRA or 401(k) without penalty if you use the funds for medical procedures.

A home equity line of credit doesn't offer a zero-interest loan, but since the funds are secured by your house, the interest rate will be far lower than a typical credit card.

If you're over 62, you can also consider a reverse mortgage and use the funds to cover the procedure.

Finally, if you're in dire financial straits, work with the hospital or doctor before you have the procedure to hash out a payment plan. Be sure to ask what the interest rate and repayment terms are, and whether you'll owe retroactive interest if you fall behind. If possible, try to review the financing agreement with a financial counselor before signing.

Medical credit cards promise ease, but often deliver steep payments. This is one scenario where "Trust me, I'm a doctor" isn't quite enough.

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